Question

What is consumer surplus? How is it illustrated on a demand and supply diagram?

Short answer

Consumer surplus is the extra benefit consumers enjoy by purchasing a product at a price lower than their maximum willingness to pay. On a demand and supply diagram, it is illustrated as the triangular area between the demand curve, the market equilibrium price line, and the vertical price axis. To find consumer surplus, determine the market equilibrium point (where demand and supply curves intersect), and calculate the area of the triangle formed by the demand curve, market equilibrium price line, and vertical axis.

Step-by-step solution

Define Consumer Surplus

Consumer surplus is an economic term that refers to the difference between the total amount that consumers are willing and able to pay for a good or service and the total amount actually paid by them. In other words, it is the extra benefit or utility enjoyed by consumers who are able to purchase a product at a price lower than their maximum willingness to pay.

Identify Demand and Supply Curves

The demand and supply curves are graphical representations of the relationship between the quantity of a good or service that consumers are willing and able to purchase (demand) and the quantity that producers are willing and able to produce (supply), at various prices. To illustrate consumer surplus on the demand and supply diagram, we need to first identify the demand and supply curves. The demand curve is represented by a downward sloping line, while the supply curve is represented by an upward sloping line.

Determine the Market Equilibrium

Market equilibrium is the point where the demand and supply curves intersect, representing the price (market equilibrium price) and quantity (market equilibrium quantity) at which consumers and producers are satisfied with the amount of goods or services being bought and sold. To find the market equilibrium point, locate the point at which the demand and supply curves intersect on the diagram.

Identify the Consumer Willingness to Pay

Consumer willingness to pay is represented by the height of the demand curve at each quantity level. To find a specific consumer's willingness to pay, locate their corresponding point on the demand curve by following it to the vertical axis (price axis). The value it touches on the price axis denotes the maximum price that particular consumer would be willing to pay for that good or service.

Calculate Consumer Surplus

Consumer surplus is the area between the demand curve and the market equilibrium price, up to the market equilibrium quantity. To calculate consumer surplus on a graph, look for the triangular area created by the demand curve, the market equilibrium price line (horizontal), and the vertical axis (price axis). The area of this triangle represents the total consumer surplus in the market.

Conclusion

In summary, consumer surplus is the extra benefit or utility enjoyed by consumers who are able to purchase a product at a price lower than their maximum willingness to pay. To illustrate consumer surplus on a demand and supply diagram, we identify the demand and supply curves, determine the market equilibrium point, and calculate the consumer surplus by finding the triangular area formed by the demand curve, market equilibrium price line, and vertical axis.